L3Harris Technologies [LHX] on Tuesday reported higher pro forma earnings and sales in its first quarter, although the company reduced its financial outlook for 2020 to account for the global slowdown in commercial aerospace business and weakness in its radio business for international, state and local customers due to the COVID-19 pandemic.
Pro forma net income, which assumes the merger between the former Harris Corp. and L3 Technologies was in effect a year ago, was up 17 percent to $808 million, $2.80 earnings per share (EPS), versus $693 million ($2.32 EPS) a year ago. The results topped consensus estimates by 19 cents EPS.
Pro forma sales in the quarter increased 5 percent to $4.6 billion from $4.4 billion a year ago. Harris and L3 closed their merger on July 1, 2019, the start of the third quarter.
Negative effects to the global economy from COVID-19 led to $330 million in charges, including for impairment of goodwill and other assets related to its commercial aviation work, L3Harris said. Most of the company’s work for the U.S. government is predictable, it said.
At the operating level top line growth was driven by work on F-35 fighter avionics, classified intelligence and cyber systems, tactical communications systems for the Defense Department, defense avionics, mission networks and maritime systems.
The company attributed pro forma gains in operating income primarily to performance and better than expected benefits across the business segments from the ongoing integration of Harris and L3. A pension tailwind also helped boost the company’s net income.
The outlook for sales this year is now between $18.3 billion and $18.6 billion, up 3 to 5 percent organically versus 2019 but below the previous target of between 5 to 7 percent.
Pro forma net income is now expected to be between $11.15 and $11.55 EOPS versus the prior outlook of between $11.35 and $11.75. The earnings outlook is still better than the $10.96 adjusted EPS the company recorded in 2019 and is due to higher sales, performance, merger integration savings, a pension tailwind, and reduced share count.
Free cash flow in the first quarter was $533 million and for the year is still expected to be between $2.6 billion and $2.7 billion. The company is maintaining its free cash flow target of $3 billion for 2022.
On Monday, L3Harris completed the $1 billion sale of its security detection and automation businesses to Leidos [LDOS]. The divestiture of two smaller businesses are expected to close later this month and by mid-year respectively, William Brown, chairman and CEO of L3Harris, said during the company’s earnings call on Tuesday.
L3Harris is still targeting divestitures accounting for 8 to 10 percent of the company’s annual sales as part of portfolio reshaping to focus on its core areas, he said.